Interstate Remote Retail Sales: Economics v. Jurisprudence in the Battle Over Tax Jurisdiction

Abstract

Retail sales and use taxes constitute a major component of state and local tax bases, providing critical funds for many public programs. The continued and increasing significance of non-taxed remote retail sales—interstate sales of goods by firms without sufficient presence in the destination jurisdiction—has put the long-term solvency of these tax bases and the public programs they fund in jeopardy. To a considerable extent, this problem is attributable to the oft-criticized “nexus” standard, a legal concept that limits a jurisdiction’s ability to tax remote transactions based on constitutional and stare decisis grounds. This paper offers a summary of the jurisprudence that has yielded the current nexus interpretation, an economic critique of its underlying principles, and several recommendations that could serve as policy alternatives to the status quo.